High demand boosts big GM debt deal

August Cole

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DETROIT (CBS.MW) -- General Motors' massive debt offering will be larger than expected as the world's largest automaker increased the size of the massive deal after heavy demand for the debt and convertible bonds.

GM officials for the Detroit-based company declined to comment on the debt deal's progress.

A person familiar with the offering said it has grown from the original $13 billion. For GM bonds, plans include $5 billion in dollar denominated debt, 2.5 billion in euros and 600 million in British pounds. For General Motors Acceptance Corp., 4 billion in euros will be offered. For a convertible offering, there's $3.5 billion on tap.

Credit analysts said the deal's appeal comes in part from the large difference in yields between U.S. Treasurys and the GM paper. Chris Struve, Fitch Ratings auto analyst who downgraded GM debt last week, said, "It means people are looking for yield."

Citigroup, Morgan Stanley and Merrill Lynch are running the credit offering for GM, which is expected to price on Thursday.

"Regardless of what you think of the deal, to get 400 [basis points] over from a corporate offering that's investment grade is unusual, especially on a deal of this size," said Struve.

The announcement last Friday that $10 billion in debt will be sold to help fortify the company's underfunded pension and another $3 billion bolster the finance operations at GMAC surprised Wall Street. But corporate borrowing remains inexpensive as U.S. interests have descended to their lowest point in four decades. See full story.

The deal will also help preserve the company's dividend, according to a research report by Ron Tadross, Banc of America's auto analyst.

"We were surprised by the size of this deal and think it is a hint as to management's reluctance to cut the dividend. We have been saying a dividend cut makes sense but we have no control," he wrote on June 23.

The number of retired GM workers handily outnumber its active employee base. That discrepancy, and a long-term industry trend of falling vehicle prices, have put the squeeze on management to come up with a way to find an aggressive and sustainable way of marketing its cars and trucks in the U.S. So far, GM's leadership in a drawn-out price war that began after Sept. 11 has been unchallenged as Ford Motor and DaimlerChrysler keep pace. But the company's Japanese rivals are also taking advantage of the cheap financing available for consumers and their dramatically smaller pension obligations in the U.S.

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